Are higher mortgage rates slowing the housing recovery?

July often sees a change in market tone. Those who have already sold their home know they need to find somewhere quickly, increasing their urgency. New buyers, however, are now quite likely to decide to wait until the Fall as the chances of being able to move in by Labor Day are diminishing. And sellers have to decide if they want to be on the market in the “dog days” of August, or wait until after Labor Day.

And then this year, of course, there has been the added factor of the jump in mortgage rates. To some extent it would appear that the Federal Reserve was surprised by the big jump in rates after what they thought was a simple statement of their intent to reduce their purchases of Treasuries and mortgage-backed securities as the economy improves.

The immediate impact of the rise in mortgage rates on the housing market recovery can be seen in some statistics published this week.

The Commerce Department reported that the volatile new housing start number dropped 10% in June from May. Most of this drop came from multifamily starts, while Single Family (SFH) starts were basically unchanged from May and up 10% from a year ago. Nevertheless, the announcement was sufficient to cause headlines such as this: Drop in Housing Starts Underscores Volatility Mid-Recovery.

Always keen to present a positive perspective, the Massachusetts Association of Realtors (MAR) published its June confidence survey. The Market Confidence Index, in which Realtors comment on the current market, was 76.4 in June, up from 59.3 a year ago, but down from 83.1 in May. Similarly, the Price Confidence Index, which measures expectations of home prices over the next year, was 75 in June, up from 60 a year ago, but again down from 82 in May.

While these numbers remain very strong, they do show a change in expectations over the last month.

In recent weeks several Federal Reserve Governors have taken to the airways to explain that the Fed has no plans to change its interest rate policy until the economy improves. While that may be true for official interest rates, we live in a market economy and the market has decided that the days of low rates are coming to an end. So rates went up, probably too far too quickly, and we are now seeing them come back a little.

So where do we stand? I’d say buyers are on notice that the Fed’s bargain sale on mortgage rates is over, but also know that rates remain at historically low levels. As for the market, there is still a shortage generally of supply, other than at the upper end. Well-priced properties are still receiving multiple offers as they hit the market. August may see a slowdown, but that looks likely to be seasonal, with a resumption of an active market after Labor Day.